Warren Buffett and Charlie Munger's Greatest Lesson of 2020

The two great investors learned a lot in 2020

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Rupert Hargreaves
May 07, 2021
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For investors, last year was one of the most challenging years of all time. The market whipsawed from depression to euphoria in a few months, and it became wholly disconnected from the economic environment. Companies losing vast amounts of money suddenly became market darlings, while others, which were profitable and established, saw their stock prices languish.

Navigating this environment was not easy. It seems even

Warren Buffett (Trades, Portfolio) had trouble.

The biggest lesson

At last weekend's Berkshire Hathaway (

BRK.A, Financial) (BRK.B, Financial) annual meeting, the Oracle of Omaha admitted that he might have made a mistake by selling some of Berkshire's Apple (AAPL, Financial) shares and airline holdings, considering everything that has occurred over the past 12 months.

Considering everything that has happened, one shareholder at the meeting wanted to know what was the biggest lesson Buffett and his right-hand man,

Charlie Munger (Trades, Portfolio), had learned throughout the year.

Buffett's answer to this question was relatively simple. He said, "Well, my biggest lesson has been to listen more to Charlie. He's been right on some things that I've been wrong on."

This is just my speculation, but I think it likely that Buffett was referring to comments made earlier on in the meeting when he stated that Munger had reprimanded him over his decision to sell some of Berkshire's Apple holding. Buffett also commented that the duo had disagreed on his decision to sell down Berkshire's Costco (

COST, Financial) holdings.

Munger's takeaway from the year was a little more cryptic. He responded to the question by saying:

"Well, I don't know. If you're not a little confused by what's going on, you don't understand it. We're in uncharted territory."

To this, Buffett added, "We enjoy, in a crazy way, actually seeing what happens."

He went on to explain that the events of the past 15 months reinforced his conviction that Berkshire needed to be positioned for all eventualities to protect its culture and shareholders for the next five to 10 decades:

"Our basic principles are we start with the fact we don't want to disappoint the people who left their money with us and things flow out of that. And we may disappoint people that don't make quite as much money. And we've seen some strange things happen in the world in the last year and 15 months, and we've always recognized the fact that stranger things are going to happen in the future. And I would say, if anything, it's reinforced our desire to figure out everything possible we can do to make sure that Berkshire is 50 or 100 years from now every bit the organization and then some that it is now."

Protecting for the future

Buffett has always tried to manage Berkshire in a way that protects its investors from uncertainty. This is one of the reasons why the conglomerate has been successful over the past few decades. It does not rely heavily on borrowing and always has lots of cash on hand. This means it has no one to answer to and can take advantage of opportunities in the market when they present themselves.

It also means Buffett can act however he sees fit. He's never under any pressure to make a deal or cut costs to improve profitability and appease creditors.

This approach has worked incredibly well for Berkshire over the years, and it's something investors can learn a lot from, both from a personal and professional perspective.

By investing sensibly and keeping a clean balance sheet, one's financial position will only improve over the years. With financial flexibility comes optionality, or the ability to do whatever one wants whenever one wants to do it. This is not possible without financial flexibility.

Buffett's biggest lesson of the past 12 months was to be prepared for everything. That's a valuable lesson for investors from all walks of life.

Disclosure: The author owns no share mentioned.

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